Construction firms could be making more of opportunities to reduce costs and drive profitability by undergoing a cost-led ESG (environmental, social and governance) transformation
Recent report data, drawn from ONS figures, suggests that the number of construction firms that have been liquidated since the pandemic began last March is higher than those in hospitality and retail, both of which were previously considered the worst-hit sectors.
At first glance, this finding is perhaps surprising, particularly as many construction sites managed to stay open for much of the crisis, with social distancing measures in place. However, construction businesses have been operating at low margins for many years, and the effects of the pandemic on productivity, profitability and cash flow have made matters worse.
To escape the downward pressure on margins and move to a more resilient operating model, business leaders in the sector recognise the need to focus on cost reduction and control, putting it at the heart of everything they do. But how many of them have considered using this cost-driven approach to improve their competitiveness while investing in a green transformation?
There are many reasons why now is the right time for businesses to reposition themselves as environmentally and socially responsible. Growing consumer awareness of the risks posed by climate change, combined with an increasing legislative push to achieve the government’s net zero carbon emissions by 2050 target, is already impacting public procurement and existing infrastructure programmes. Investors are also actively looking for evidence of ESG commitments before funding new projects.
Recognising the growing focus on ESG, the Construction Leadership Council has recently called for industry support to drive the delivery of net zero in the built environment. As part of this, they have highlighted the importance of measuring each project’s carbon emissions and its impact on communities and local economies. The government has also confirmed its intention to consult on plans to share quarterly data on the industry’s progress to net zero.
To ensure their survival in both the near and longer term, construction firms must not only focus on addressing margin erosion by improving and controlling costs, they must also elevate ESG commitments and reporting. When done well, taking control of the cost base and minimising waste throughout a firm’s operations and across its supply chain, can help to improve margins and boost profitability significantly. It can also unlock opportunities to further enhance enterprise value by establishing new social value partnerships, reducing the business’s carbon footprint and sourcing sustainable materials and equipment.
Cost leadership is critical to delivering a green transformation and it can’t be achieved without extracting insights from data. As well as having a detailed understanding of their cost base and where value lies, businesses must create new bespoke ways of measuring their ESG performance, drawing on the industry frameworks that are emerging.
The pandemic has accentuated the cashflow and margin pressures that many construction businesses are experiencing. However, the crisis has also presented an opportunity to reduce costs while creating a greener and more responsible operating model that is built to last.
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For leaders of construction firms, we outline three foundations for successful cost transformation programmes that could help achieve double-digital margins.